## sipea2025160 - For a few decades after its independence, Botswana achieved substantial economic and social progress

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### Overview and turning point
- Botswana became "one of the richest countries in Sub-Saharan Africa" with per capita income surpassing South Africa’s since the early 2000s.
- Strengths: strong institutions, political stability, prudent macroeconomic management, investments in health and education, effective translation of diamond wealth into public investment and social gains.
- Recent shift: development momentum has significantly slowed over the past two decades, with a sharp downturn culminating in a severe contraction in 2024 due to a deeper-than-expected and likely prolonged decline in diamond demand.
- Current policy imperative: fiscal buffers are essentially depleted and substantial fiscal consolidation is needed alongside long-postponed diversification reforms to promote private sector development and more resilient, inclusive growth.

### Structural concentration and constraints on diversification
- Economy highly concentrated in the capital-intensive diamond sector, increasing vulnerability to external shocks and contributing to volatility in growth and employment.
- Structural challenges constraining inclusive growth: high inequality, persistent high unemployment (especially among youth), and uneven spatial development.
- Indicators point to narrowing productive capabilities (declining Economic Complexity Index), underscoring urgency of structural transformation.

### Analytical approach of the Selected Issues Paper (SIP)
- Dual approach:
  - Bottom-up: firm-level evidence from the 2023 World Bank Enterprise Survey (WBES) to identify daily constraints faced by businesses.
  - Top-down: macro structural reform benchmarking using the empirical methodology developed by Budina et al. (2023) to assess structural gaps relative to reform frontiers and estimate potential growth dividends from reforms in labor market regulation, governance, external sector, and credit markets.
- Complementarity: considerable overlap between WBES-identified bottlenecks and cross-country structural gap findings, reinforcing policy priorities.

### Falling Economic Complexity
- ECI trajectory:
  - Botswana slid from around rank 92 (2000) to rank 102 (2023) on the global ECI rankings.
  - Current index value near –0.67.
- Export and industry shares:
  - Diamonds accounted for about 80 percent of exports in 2023.
  - Manufacturing sector accounts for only about 5 percent of GDP.
  - Comparative manufacturing shares: over 30 percent in Lesotho and eSwatini, 10 percent in Namibia, and 15 percent in South Africa.
- Implications:
  - Declining ECI signals production and export of a narrower, less sophisticated set of goods, reducing long-term growth prospects and resilience to external shocks.

### Using WBES as a “bottom-up” diagnostic tool
- WBES contributions:
  - Captures objective indicators (e.g., frequency of electricity outages, time to obtain permits) and subjective perceptions (finance, corruption, regulation, infrastructure).
  - 2023 WBES expanded coverage: sampled 622 establishments nationwide versus 268 firms in Gaborone and Francistown in 2010.
  - Identified persistent constraints: limited access to finance, governance issues and cumbersome regulation, land acquisition challenges, and infrastructure deficits.

### Obstacle 1 – Access to Finance (findings)
- WBES ranking: 25 percent of businesses reported that access to finance is their biggest problem (2023).
- Financial depth and inclusion:
  - Only about 8 percent of Botswana’s micro, small and medium enterprises had a bank loan in 2019.
  - Private sector credit is around 30 percent of GDP in Botswana.
  - For comparison, South Africa’s private credit is about 90 percent of GDP.
- Structural features:
  - Financial system is bank-dominated, cautious, and favors low-risk, well-collateralized borrowers.
  - Absence of robust microfinance sector or local venture capital limits financing options.

### Obstacle 1 – Policy recommendations
- Strengthen credit infrastructure: Improve financial information and reduce collateral constraints, including expanding credit bureaus and fully operationalizing a movable collateral registry.
- Promote diverse financing instruments: Enable and encourage banks and non-bank institutions to offer products tailored to MSMEs; expand access to innovative financial products—such as accounts receivable financing with more flexible collateral requirements—and expand digital payment services by developing acquiring infrastructure, improving system interoperability, and enabling the entry of new market participants.
- Reorient public support schemes: Adopt a catalytic approach where public SME funds co-invest alongside banks or investors, share risk, and focus on capacity-building; carefully target and performance-monitor any remaining government credit programs.
- Enhance competition in the banking sector: Use regulatory sandboxes and proportional licensing (for microfinance banks, for instance); develop domestic capital markets (bond and equity listings for midsize firms).

### Obstacle 1 – Expected outcomes
- International experience indicates that when credit flows to productive smaller firms, countries gain in innovation, employment, and diversification.
- In Botswana’s context, improved financial inclusion aligns with goals of reducing unemployment and fostering a more dynamic private sector-led economy.

### Obstacle 2 – Corruption (findings)
- Historical strength: Botswana frequently cited as the least corrupt nation in mainland Africa and consistently ranks among top performers in Transparency International’s Corruption Perceptions Index.
- Recent trend: "the perception of corruption has deteriorated over the last decade. The widely tracked Corruption Perception Index computed by Transparency International declined by about 12 percent between 2012 and" [text ends].
- WBES: corruption is the second most mentioned obstacle to development, with 13 percent of businesses naming it as a major issue, up from 10 percent in the 2010 WBES.
- Empirical findings cited:
  - Mauro (1995): a one standard-deviation improvement in bureaucratic efficiency is associated with a boost of annual per capita GDP growth by around one percentage point.
  - Hammadi and others (2019): for a middle-income country, moving from a low-corruption rank to a mediocre one tends to reduce long-term GDP per capita levels through lower productivity and human capital accumulation.
  - Chapter 2 of the 2019 IMF Fiscal Monitor: corruption undermines growth by eroding tax revenues, distorting spending, reducing efficiency of public investment, enabling evasion and exemptions, inflating procurement costs, weakening SOE performance, and crowding out social spending.

### Corruption and governance — Policy recommendations
- Bolster institutional checks and oversight:
  - Empower anti-corruption agencies like the DCEC with greater independence, resources, and investigative authority.
  - Ensure Auditor General and parliamentary committees can rigorously scrutinize public spending and tenders.
  - Maintain and reinforce judicial independence.
- Enhance transparency and e-governance:
  - Expand e-procurement systems for public tenders.
  - Publish budget information, mining revenues, and contract details openly.
  - Adhere to initiatives like the Extractive Industries Transparency Initiative (EITI) in the diamond sector.
- Simplify regulations and reduce red tape:
  - Streamline business licenses, permits, and customs procedures; adopt one-stop-shop services.
- Share experiences and engage international frameworks:
  - Participate in regional anti-corruption forums and adopt international standards such as the OECD Anti-Bribery Convention.

### Expected payoffs from governance improvements
- Sustained investor confidence.
- More efficient use of public resources.
- Continued translation of natural resource wealth into broad-based development.
- Long-run view: maintaining low corruption is an economic strategy for robust and inclusive growth.

### Obstacle 3 — Access to land (findings)
- In the 2023 WBES, 13 percent of firms consider land access their most important obstacle.
- Main problem: fragmented and inefficient land administration from coexistence of customary, state, and freehold land systems.
- Customary land (majority) managed by Land Boards often lacks clear, formal documentation, creating delays, weak land security, and hampering use of land as collateral.
- Certificates of Customary Land Grant (CCLGs) and conversion to leasehold remain complex and slow, particularly for SMEs and female-headed households.
- Botswana's land policy is nominally gender-neutral, but implementation often falls short for equitable access for women.

### Obstacle 4 — Electricity (findings)
- In the 2023 WBES, 11 percent of firms consider electricity supply their main obstacle.
- Electricity tariffs are in the mid to high range in the Southern African region despite subsidies and partial liberalization.
- Botswana Power Corporation (BPC) faces operational inefficiencies, aging infrastructure, and fiscal dependency.
- Power outages and voltage fluctuations raise production costs and deter energy-intensive investment.
- Reliance on imports from South Africa and Namibia exposes Botswana to external supply risks.
- National Energy Policy (2021) commits to diversifying energy sources and increasing renewables, but implementation has been slow and regulatory uncertainty inhibits independent power producers (IPPs).

### Electricity policy recommendations
- Strengthen the financial viability and operational performance of BPC.
- Invest in grid modernization and regional interconnections.
- Incentivize renewable energy development through transparent regulation and feed-in tariffs.
- Promote mini-grid and off-grid solutions for underserved areas.
- Reduce regulatory barriers to entry for IPPs and improve energy governance.

### Structural reforms in Botswana — empirical assessment: scope and methodology
- Focus: identify reform areas to unlock growth potential and promote diversification by comparing Botswana to advanced and frontier emerging economies.
- Uses the structural reforms database and empirical analysis from Budina and others (2023), panel of 54 EMDEs over 1985–2021.
- Constructs a composite Structural Reform Index (SRI) covering domestic finance, trade, labor, and product markets.
- Empirical approach: fixed-effects panel regressions and a local projection approach to estimate the dynamic effects of reforms on real GDP per capita growth, accounting for short-term adjustment costs and long-term gains.
- Interactions examined: institutional quality, debt vulnerabilities, and climate policy objectives.

### Structural gaps — key measured results (2000–22 normalization)
- Governance:
  - Gap with Advanced Economies narrowed marginally from 0.29 (2017) to 0.26 (2022).
  - Gap with Emerging Markets widened from 0.08 (2017) to 0.10 (2022).
- Business regulation:
  - Gap with Advanced Economies widened from 0.31 (2017) to 0.35 (2022).
  - Gap with Emerging Markets increased from 0.13 (2017) to 0.15 (2022).
- External sector:
  - Gap with Advanced Economies narrowed from 0.37 (2017) to 0.34 (2022).
  - Gap with Emerging Markets narrowed from 0.33 (2017) to 0.29 (2022).
  - Non-tariff barriers in EMs narrowed from 0.58 to 0.54 and tariff barriers from 0.46 to 0.33; in AEs non-tariff barriers fell from 0.64 to 0.61 and tariff barriers from 0.50 to 0.36.
  - Financial openness gap widened: EMs from 0.25 to 0.31; AEs from 0.25 to 0.36.
  - Capital controls unchanged (0.46 in EMs, 0.31 in AEs).
  - Black-market exchange rate gap stayed at zero.
- Credit market regulation:
  - Gap with Advanced Economies widened from 0.09 (2017) to 0.19 (2022).
  - Gap with Emerging Markets widened from 0.09 (2017) to 0.17 (2022).
  - Botswana’s gap in interest rate controls score rose from 0.0 to 0.3.
- Labor market regulation:
  - 2022 reform gap: 0.67 relative to Advanced Economies and 0.53 relative to Emerging Markets.
  - Gap in hiring and firing regulations unchanged at 0.81 (AEs) and 0.72 (EMs).
  - Gap in centralized collective bargaining widened by 0.06 between 2017 and 2022.

### Estimating the potential impact of structural reforms
- Local projection specification:
  - y_{i,t+k} − y_{i,t−1} = α_i + λ_t + β^k ΔSR_{i,t} + θ X′_{i,t} + ε_{i,t}
  - y_{i,t+k} is the log of real GDP (PPP); α_i and λ_t are country and year fixed effects; ΔSR_{i,t} is change in average structural reform score between t and t-1; X′_{i,t} includes time-varying controls and lags.
- Caution: the local projection approach is less robust to endogeneity; large coefficients should be interpreted with caution.
- Estimated reform multipliers are combined with Botswana’s structural gaps to identify priority reform areas.

### Impact of first-generation reforms on growth
- A 50 percent narrowing of the first-generation reform gaps is associated with:
  - a 1.2 percentage point increase in real GDP growth in the short term.
  - a 2.0 percentage point gain in the medium term.
- The external sector accounts for the largest structural gap within this set and could deliver a 2.1 percentage point boost to growth in the medium term.
- Results reported are statistically significant at the 10-percent level.

### Botswana-specific findings on labor and external sector reforms
- Labor market reforms represent the widest gap and offer the highest dividends:
  - Closing half the labor market gap could boost employment by 3.9 percentage points in the short term.
  - Closing half the labor market gap could boost employment by 3.0 percentage points in the medium term.
- External sector reforms present a sizeable opportunity, particularly over the medium term.
- Complementary reforms in governance and business regulation could further enhance growth and strengthen the broader reform impact.

### Lessons learned (convergence of survey and macro-empirical approaches)
- WBES firm-level analysis and cross-country macro-empirical analysis converge on diagnosis and policy direction:
  - WBES identifies firm-level constraints: access to land, finance, skilled labor, and regulatory burdens—explaining underdevelopment of non-mineral sectors and declining economic complexity.
  - Empirical analysis indicates highest gains for growth could come from labor market adjustments; governance and credit market reforms also offer meaningful growth dividends.
- Binding constraints across approaches:
  - Inefficiencies in public resource allocation.
  - Underperforming private sector capabilities.
  - Need to shift from state-driven to market-enabled growth.
- Priorities: first-generation reforms in labor markets, governance, credit markets, and trade openness to unlock private sector–led growth and accelerate diversification.

### Policy advice and recommended reform actions
- Improve Access to Land:
  - Digitize and update land registries, especially in urban and peri-urban areas.
  - Streamline and decentralize land allocation processes.
  - Allow the use of customary land as collateral, with clear legal frameworks for conversion to leasehold.
  - Increase transparency in land transactions.
- Enhance Access to Finance:
  - Support credit guarantee schemes for SMEs.
  - Deepen capital markets to diversify financing options.
  - Improve property rights and contract enforcement.
  - Encourage use of movable assets as collateral through secured transaction reforms.
- Boost Human Capital and Skills:
  - Align vocational and tertiary education with labor market needs.
  - Expand public-private training partnerships.
  - Implement targeted upskilling programs for youth and rural populations.
- Simplify Regulation and Lower Compliance Burden:
  - Establish a one-stop shop for business registration and licensing.
  - Digitize permit and inspection processes.
  - Conduct regulatory impact assessments before new laws are passed.
- Improve Infrastructure and Utilities:
  - Invest in reliable electricity and water supply, particularly in industrial zones.
  - Expand affordable internet and broadband access.
  - Promote PPPs for infrastructure development.
- Foster Competition and Reduce Market Concentration:
  - Strengthen competition policy enforcement.
  - Encourage contestability in procurement and public service delivery.
  - Review and rationalize industrial and tax incentives to be performance-based.
- Strengthen Governance and Institutions:
  - Implement a national productivity and innovation strategy.
  - Reduce corruption risks by improving procurement systems and public financial management transparency.
  - Enhance judicial efficiency to resolve commercial disputes quickly and fairly.

### Conclusion and sequencing
- Botswana must address persistent structural impediments to realize growth potential and diversify away from mineral dependence.
- Two reform areas overlap across analytical approaches: access to finance, and corruption and governance—these suppress firm productivity and investment and undermine macro performance.
- Complementary reform gaps identified: labor markets, external sector openness, land tenure, and electricity shortages—addressing these could unlock substantial growth dividends and employment gains.
- Policymakers should prioritize and sequence reforms strategically, focusing on enhancing institutional quality, improving credit access, modernizing land administration, and advancing energy reforms.
- Sustained progress will require strong political will, effective implementation, and inclusive consultation with private sector actors.

*Source: sipea2025160 - 36.      First-generation (IMF staff chapter).*

### 1.      For a few decades after its independence, Botswana achieved substantial economic and social

### sipea2025160 - 1.      For a few decades after its independence, Botswana achieved substantial economic and social 

### Overview and turning point
- Botswana achieved substantial economic and social progress in the decades after independence, becoming "one of the richest countries in Sub-Saharan Africa" with per capita income surpassing South Africa’s since the early 2000s.
- Strengths: strong institutions, political stability, prudent macroeconomic management, investments in health and education, effective translation of diamond wealth into public investment and social gains.
- Recent shift: development momentum has significantly slowed over the past two decades, with a sharp downturn culminating in a severe contraction in 2024 due to a deeper-than-expected and likely prolonged decline in diamond demand.
- Current policy imperative: fiscal buffers are essentially depleted and substantial fiscal consolidation is needed alongside long-postponed diversification reforms to promote private sector development and more resilient, inclusive growth.

### Structural concentration and constraints on diversification
- Botswana’s economy remains highly concentrated in the capital-intensive diamond sector, increasing vulnerability to external shocks and contributing to volatility in growth and employment.
- Structural challenges constraining inclusive growth: high inequality, persistent high unemployment (especially among youth), and uneven spatial development.
- Indicators point to narrowing productive capabilities (declining Economic Complexity Index), underscoring urgency of structural transformation.

### Analytical approach of the Selected Issues Paper (SIP)
- Dual approach:
  - Bottom-up: firm-level evidence from the 2023 World Bank Enterprise Survey (WBES) to identify daily constraints faced by businesses (e.g., limited access to finance, corruption, land acquisition difficulties, unreliable electricity).
  - Top-down: macro structural reform benchmarking using the empirical methodology developed by Budina et al. (2023) to assess structural gaps relative to reform frontiers and estimate potential growth dividends from reforms in labor market regulation, governance, external sector, and credit markets.
- Complementarity: considerable overlap between WBES-identified bottlenecks and cross-country structural gap findings, reinforcing confidence in policy priorities.

### Falling Economic Complexity
- ECI trajectory:
  - Botswana slid from around rank 92 (2000) to rank 102 (2023) on the global ECI rankings.
  - Current index value near –0.67.
- Export concentration and industry shares:
  - Diamonds accounted for about 80 percent of exports in 2023.
  - Manufacturing sector accounts for only about 5 percent of GDP.
  - Comparative manufacturing shares: over 30 percent in Lesotho and eSwatini, 10 percent in Namibia, and 15 percent in South Africa.
- Implications:
  - Declining ECI signals production and export of a narrower, less sophisticated set of goods.
  - Falling economic complexity reduces long-term growth prospects, resilience to external shocks, and ability to upgrade into higher value-added sectors.
  - For resource-dependent economies like Botswana, falling ECI increases vulnerability to commodity price volatility and hampers diversification efforts.

### Using WBES as a “bottom-up” diagnostic tool
- WBES contributions:
  - Captures objective indicators (e.g., frequency of electricity outages, time to obtain permits) and subjective perceptions (finance, corruption, regulation, infrastructure).
  - 2023 WBES expanded coverage: sampled 622 establishments nationwide versus 268 firms in Gaborone and Francistown in 2010.
  - Identified persistent constraints: limited access to finance, governance issues and cumbersome regulation, land acquisition challenges, and infrastructure deficits.

### Obstacle 1 – Access to Finance (findings)
- WBES ranking: 25 percent of businesses reported that access to finance is their biggest problem (2023).
- Financial depth and inclusion:
  - Only about 8 percent of Botswana’s micro, small and medium enterprises had a bank loan in 2019.
  - Private sector credit is around 30 percent of GDP in Botswana.
  - For comparison, South Africa’s private credit is about 90 percent of GDP.
- Structural features:
  - Botswana’s financial system is bank-dominated, cautious, and favors low-risk, well-collateralized borrowers (often larger firms).
  - Absence of robust microfinance sector or local venture capital limits financing options.
- Cross-country evidence: up to one-third of firms in many African and emerging markets report limited finance as a major constraint; financing obstacles have larger negative growth impacts on small firms.

### Obstacle 1 – Policy recommendations (preserving exact phrasing and listed measures)
- Strengthen credit infrastructure: Improve financial information and reduce collateral constraints. This includes expanding credit bureaus and fully operationalizing a movable collateral registry, so banks can lend against assets beyond fixed property.
- Promote diverse financing instruments. Undertake the necessary reforms to enable and encourage banks and non-bank institutions to offer products tailored to micro, small, and medium enterprises (MSMEs). Expanding access to innovative financial products—such as accounts receivable financing with more flexible collateral requirements—would provide firms with much-needed breathing space. More broadly, the expansion of digital payment services could facilitate real-time transactions by developing acquiring infrastructure, improving system interoperability, and enabling the entry of new market participants.
- Reorient public support schemes: Rather than direct lending by state-owned banks, which can sometimes crowd out private lenders, Botswana can adopt a catalytic approach. Public SME funds could co-invest alongside banks or investors, sharing risk, and focus on capacity-building (training entrepreneurs in finance and management). This approach, used in countries like Chile (through CORFO’s programs; Griffith-Jones and others 2018) and Malaysia, helps improve bankability of SMEs and ensures that public resources mobilize private capital rather than substitute for it. Any remaining government credit programs should be carefully targeted and performance-monitored to avoid distortions.
- Enhance competition in the banking sector: Botswana’s banking sector is profitable and liquid, suggesting room to extend more credit if competitive pressures increase. Regulatory sandboxes and proportional licensing (for microfinance banks, for instance) could foster a more inclusive financial landscape. Over the medium term, developing domestic capital markets (bond and equity listings for midsize firms) would provide alternative financing and reduce the over-reliance on banks.

### Obstacle 1 – Expected outcomes
- International experience indicates that when credit flows to productive smaller firms, countries gain in innovation, employment, and diversification.
- In Botswana’s context, improved financial inclusion aligns with goals of reducing unemployment and fostering a more dynamic private sector-led economy.

### Obstacle 2 – Corruption (findings)
- Historical strength: Strong governance historically; Botswana frequently cited as the least corrupt nation in mainland Africa and consistently ranks among top performers in Transparency International’s Corruption Perceptions Index.
- Economic role: Good governance contributed to attracting investment and managing diamond revenues; corruption generally acts as a tax on investment and undermines efficiency and confidence.
- Recent trend: "the perception of corruption has deteriorated over the last decade. The widely tracked Corruption Perception Index computed by Transparency International declined by about 12 percent between 2012 and"

*Source: sipea2025160 - 1. For a few decades after its independence, Botswana achieved substantial economic and social progress (Selected Issues Paper content).*

### 2024. Furthermore, businesses have

### sipea2025160 - 2024. Furthermore, businesses have

### Corruption and governance: findings and risks
- In the 2023 WBES, corruption is the second most mentioned obstacle to development, with 13 percent of businesses naming it as a major issue, up from 10 percent in the 2010 WBES.
- Mauro (1995) estimates that a one standard-deviation improvement in bureaucratic efficiency is associated with a boost of annual per capita GDP growth by around one percentage point.
- Hammadi and others (2019) find that for a middle-income country, moving from a low-corruption rank to a mediocre one tends to reduce long-term GDP per capita levels through lower productivity and human capital accumulation.
- Chapter 2 of the 2019 IMF Fiscal Monitor: corruption undermines growth by eroding tax revenues, distorting spending toward rent-seeking projects, reducing the efficiency of public investment and services, enabling evasion and exemptions, inflating procurement costs, weakening SOE performance, and crowding out social spending—ultimately reducing capital formation, human capital, and trust in institutions.
- Research suggests the growth dividend of governance reforms in sub-Saharan Africa is two to three times larger than in other regions.
- Implication for Botswana: reinforcing good governance could enhance regional competitiveness and amplify the diversification drive.

### Policy recommendations to strengthen governance
- Bolster institutional checks and oversight:
  - Empower anti-corruption agencies like the DCEC with greater independence, resources, and investigative authority.
  - Ensure Auditor General and parliamentary committees can rigorously scrutinize public spending and tenders.
  - Maintain and reinforce judicial independence so corruption cases are handled fairly and without political interference.
- Enhance transparency and e-governance:
  - Expand e-procurement systems for public tenders (digital platforms for bids and awards).
  - Publish budget information, mining revenues, and contract details openly (open data portals).
  - Adhere to initiatives like the Extractive Industries Transparency Initiative (EITI) in the diamond sector.
- Simplify regulations and reduce red tape:
  - Streamline business licenses, permits, and customs procedures; adopt one-stop-shop services and clearer rules to reduce petty corruption incentives.
- Share experiences and engage international frameworks:
  - Participate in regional anti-corruption forums.
  - Adopt international standards such as the OECD Anti-Bribery Convention and use World Bank integrity diagnostics.

### Expected payoffs from governance improvements
- Sustained investor confidence.
- More efficient use of public resources.
- Continued translation of natural resource wealth into broad-based development.
- Long-run view: maintaining low corruption is an economic strategy for robust and inclusive growth.

### Obstacle 3 — Access to land: findings
- In the 2023 WBES, 13 percent of firms consider land access their most important obstacle.
- Main problem: fragmented and inefficient land administration arising from coexistence of customary, state, and freehold land systems.
- Customary land (majority) is managed by Land Boards but often lacks clear, formal documentation, creating delays, weak land security, and hampering use of land as collateral.
- Institutional overlaps, slow allocation processes, and limited coordination between national and local authorities compound access issues, especially for businesses and women.
- Certificates of Customary Land Grant (CCLGs) and conversion to leasehold remain complex and slow, particularly for SMEs and female-headed households.
- Botswana's land policy is nominally gender-neutral, but implementation often falls short for equitable access for women.
- Comparative evidence: Rwanda’s national land registry and digitized titling improved investment and credit access (Ali, Deininger, & Goldstein, 2011). LAPCAS succeeded in mapping a large portion of the country, but legal integration and validation into the formal cadaster remain incomplete.

### Obstacle 4 — Electricity: findings
- In the 2023 World Bank Enterprise Survey, 11 percent of firms consider electricity supply their main obstacle.
- Electricity tariffs are in the mid to high range in the Southern African region despite subsidies and partial liberalization.
- Botswana Power Corporation (BPC) faces operational inefficiencies, aging infrastructure, and fiscal dependency.
- Power outages and voltage fluctuations raise production costs and deter energy-intensive investment.
- Reliance on imports from South Africa and Namibia exposes Botswana to external supply risks.
- Insufficient generation capacity and a fragile grid increase vulnerability to shortages and transmission losses.
- SMEs are particularly harmed due to limited capital for backup solutions.
- Lack of a transparent and competitive electricity market limits private investment in generation and renewables.
- National Energy Policy (2021) commits to diversifying energy sources and increasing renewables, but implementation has been slow and regulatory uncertainty inhibits independent power producers (IPPs).

### Electricity policy recommendations
- Strengthen the financial viability and operational performance of BPC.
- Invest in grid modernization and regional interconnections.
- Incentivize renewable energy development through transparent regulation and feed-in tariffs.
- Promote mini-grid and off-grid solutions for underserved areas.
- Reduce regulatory barriers to entry for IPPs and improve energy governance.

### Structural reforms in Botswana — empirical assessment: scope and methodology
- Focus: identify reform areas to unlock growth potential and promote diversification by comparing Botswana to advanced and frontier emerging economies.
- Uses the structural reforms database and empirical analysis from Budina and others (2023), panel of 54 EMDEs over 1985–2021.
- Constructs a composite Structural Reform Index (SRI) covering domestic finance, trade, labor, and product markets.
- Empirical approach: fixed-effects panel regressions to estimate dynamic effects of reforms on real GDP per capita growth, accounting for short-term adjustment costs and long-term gains.
- Interactions examined: institutional quality, debt vulnerabilities, and climate policy objectives.

### Structural gaps — measured indicators and key results
- Indicators normalized between 0 and 1 over 2000–22; structural gaps are absolute differences between frontier (maximum) and Botswana.
- Governance:
  - Gap with Advanced Economies narrowed marginally from 0.29 (2017) to 0.26 (2022).
  - Gap with Emerging Markets widened from 0.08 (2017) to 0.10 (2022).
- Business regulation:
  - Gap with Advanced Economies widened from 0.31 (2017) to 0.35 (2022).
  - Gap with Emerging Markets increased from 0.13 (2017) to 0.15 (2022).
- External sector:
  - Gap with Advanced Economies narrowed from 0.37 (2017) to 0.34 (2022).
  - Gap with Emerging Markets narrowed from 0.33 (2017) to 0.29 (2022).
  - Disaggregated: highest gaps in non-tariff barriers and tariff barriers; non-tariff barriers in EMs narrowed from 0.58 to 0.54 and tariff barriers from 0.46 to 0.33; in AEs non-tariff barriers fell from 0.64 to 0.61 and tariff barriers from 0.50 to 0.36.
  - Financial openness gap widened: EMs from 0.25 to 0.31; AEs from 0.25 to 0.36.
  - Capital controls unchanged (0.46 in EMs, 0.31 in AEs).
  - Black-market exchange rate gap stayed at zero.
- Credit market regulation:
  - Gap with Advanced Economies widened from 0.09 (2017) to 0.19 (2022).
  - Gap with Emerging Markets widened from 0.09 (2017) to 0.17 (2022).
  - Botswana’s gap in interest rate controls score rose from 0.0 to 0.3.
- Labor market regulation:
  - 2022 reform gap: 0.67 relative to Advanced Economies and 0.53 relative to Emerging Markets (widest across pillars).
  - Gap in hiring and firing regulations unchanged at 0.81 (AEs) and 0.72 (EMs).
  - Gap in centralized collective bargaining widened by 0.06 between 2017 and 2022.

### Estimating the potential impact of structural reforms
- Empirical framework uses a local projection approach in panel data to estimate reform impacts on output; specification:
  - y_{i,t+k} − y_{i,t−1} = α_i + λ_t + β^k ΔSR_{i,t} + θ X′_{i,t} + ε_{i,t}
  - where y_{i,t+k} is the log of real GDP (PPP) for country i in year t+k; α_i and λ_t are country and year fixed effects; ΔSR_{i,t} is the change in the average structural reform score for country i between t and t-1; X′_{i,t} includes time-varying controls, lags of the dependent variable, past reforms, and simultaneous and past reforms in other areas.
- Note: the local projection approach is less robust to endogeneity; large coefficients should be interpreted with caution.
- The estimated reform multipliers are combined with Botswana’s structural gaps to identify priority reform areas.

*Source: Excerpt from sipea2025160 - 2024. Furthermore, businesses have (IMF staff analysis).*

### 36.      First-generation

### 36.      First-generation

### Impact of first-generation reforms on growth
- A 50 percent narrowing of the first-generation reform gaps is associated with:
  - a 1.2 percentage point increase in real GDP growth in the short term.
  - a 2.0 percentage point gain in the medium term.
- The external sector accounts for the largest structural gap within this set and could deliver a 2.1 percentage point boost to growth in the medium term.
- Results reported are statistically significant at the 10-percent level.
- Figure notes: impacts are estimated by simulating Botswana closing the gap to the Emerging Markets frontier by 50 percent; coefficients at the end of the projection horizon (average of last two periods) represent cumulative percent change in output over five years, converted to annual contribution using CAGR formula.

### Botswana-specific findings on labor and external sector reforms
- Labor market reforms represent the widest gap for Botswana and offer the highest dividends:
  - Closing half the labor market gap could boost employment by 3.9 percentage points in the short term.
  - Closing half the labor market gap could boost employment by 3.0 percentage points in the medium term.
- External sector reforms present a sizeable opportunity, particularly over the medium term.
- Complementary reforms in governance and business regulation could further enhance growth and strengthen the broader reform impact.
- Figure notes: employment impacts use the same 50 percent gap-closure counterfactual and conversion method as output; results are statistically significant at the 10-percent level.

### Lessons learned (convergence of survey and macro-empirical approaches)
- Both the WBES-based firm-level analysis and the cross-country macro-empirical analysis converge on diagnosis and policy direction:
  - WBES identifies firm-level constraints: access to land, finance, skilled labor, and regulatory burdens—explaining underdevelopment of non-mineral sectors and declining economic complexity.
  - Empirical analysis indicates highest gains for growth could come from labor market adjustments; governance and credit market reforms also offer meaningful growth dividends.
- Binding constraints across approaches:
  - Inefficiencies in public resource allocation.
  - Underperforming private sector capabilities.
  - Need to shift from state-driven to market-enabled growth.
- Priorities: first-generation reforms in labor markets, governance, credit markets, and trade openness to unlock private sector–led growth and accelerate diversification.

### Policy advice and recommended reform actions
- Improve Access to Land
  - Digitize and update land registries, especially in urban and peri-urban areas.
  - Streamline and decentralize land allocation processes to reduce bureaucratic delays.
  - Allow the use of customary land as collateral, with clear legal frameworks for conversion to leasehold.
  - Increase transparency in land transactions to reduce rent-seeking and provide investors with clarity on land availability.
- Enhance Access to Finance
  - Support credit guarantee schemes for SMEs to reduce collateral requirements.
  - Deepen capital markets to diversify financing options beyond traditional banking.
  - Improve property rights and contract enforcement to lower the risk premium in lending.
  - Encourage the use of movable assets as collateral through secured transaction reforms.
- Boost Human Capital and Skills
  - Align vocational and tertiary education with labor market needs, especially in technical and digital skills.
  - Expand public-private training partnerships, particularly in tradable sectors.
  - Implement targeted upskilling programs for youth and rural populations to reduce mismatches.
- Simplify Regulation and Lower Compliance Burden
  - Establish a one-stop shop for business registration and licensing.
  - Digitize permit and inspection processes to increase efficiency and transparency.
  - Conduct regulatory impact assessments before new laws are passed, to reduce unnecessary burdens on firms.
- Improve Infrastructure and Utilities
  - Invest in reliable electricity and water supply, particularly in industrial zones.
  - Expand affordable internet and broadband access to facilitate digital business operations.
  - Promote public-private partnerships (PPPs) for infrastructure development, with clear regulatory oversight.
- Foster Competition and Reduce Market Concentration
  - Strengthen competition policy enforcement, particularly in sectors with state-owned enterprises or monopolies.
  - Encourage contestability in procurement and public service delivery to open space for private firms.
  - Review and rationalize industrial and tax incentives to ensure they are performance-based and do not distort markets.
- Strengthen Governance and Institutions
  - Implement a national productivity and innovation strategy, including support for startups and R&D.
  - Reduce corruption risks by improving procurement systems and public financial management transparency.
  - Enhance judicial efficiency to resolve commercial disputes quickly and fairly.

### Conclusion and sequencing
- Botswana must address persistent structural impediments to realize growth potential and diversify away from mineral dependence.
- Two reform areas overlap across analytical approaches: access to finance, and corruption and governance—these suppress firm productivity and investment and undermine macro performance.
- Complementary reform gaps identified: labor markets, external sector openness, land tenure, and electricity shortages—addressing these could unlock substantial growth dividends and employment gains.
- Policymakers should prioritize and sequence reforms strategically, focusing on:
  - Enhancing institutional quality.
  - Improving credit access.
  - Modernizing land administration.
  - Advancing energy reforms.
- Sustained progress will require strong political will, effective implementation, and inclusive consultation with private sector actors.

*Source: sipea2025160 - 36.      First-generation (IMF staff chapter).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025160.pdf_